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Why Are There Cronut Scalpers?

Between the din of the cicadas appearing up and down the East Coast and the media frenzy over the government’s mass surveillance programs, you might not have heard much about New Yorkers’ real obsession at the moment: the “cronut.” A cross between a croissant and a donut, the cronut is the invention of baker Dominique Ansel, who operates out of a shop in SoHo. Cronuts are so popular that lines form at 6 a.m. — 2 hours before the shop opens — and Ansel runs out within minutes. Thanks to the wonders of the Internet (and Craigslist) there is even a cronut black market, with unauthorized cronut scalpers charging up to $40 apiece for home delivery (a mark up of 700%). And of course there are cronut knockoffs appearing all over the world. Ansel has even trademarked the name “cronut.”

Which brings up two questions:

Why did it take so long for someone to invent a croissant-donut mash-up?

And, perhaps more importantly for those who want to eat them, why do we see a cronut shortage? The genius of capitalism is that it matches supply with demand – and if there’s a lot of demand for cronuts, supply should quickly expand. Especially here. Cronuts aren’t especially hard to make, don’t require expensive equipment, and are currently unregulated (although give Mayor Bloomberg time. )

Let’s take the second question, on scarcity. As the New York Times recently described for concert tickets, the existence of scalpers is an economic puzzle. For cronuts, it is even more so, since while it is more or less impossible to knock off Tom Petty, it is possible—indeed, it is virtually inevitable—that lots of cronut knockoffs are coming. So one logical strategy for Ansel is to simply ramp up supply, or prices, or both, and capture the surplus that currently the cronut-scalpers on Craigslist are taking, at least until the knockoffs arrive. But as he told New York Magazine, he’s not doing that:

I’ve said it once and will say it again: This bakery is not a cronut store. The flagship is very precious to me. You know, my name is on the door, and I don’t want to see it scaled out and lose its charm. There’s an integrity behind businesses that don’t do that, which I believe in. Will we expand? Yes, sure. But in a different and more creative way than just punching out the same model. I believe businesses should have heart behind it. Customers can tell the difference. And as a chef, you want to be able to look at your fellow chefs and stand tall, not feeling like you’ve sold out.

So Ansel is not scaling up or selling out—two common ways to deal with excess demand. The alternative strategy Ansel has pursued is to try to lock up the cronut name, and thereby force other croissant-donut hybrid purveyors to come up with some other name to signify their goodies. In doing so, he can play a long game (assuming that consumers’ ardor for cronuts doesn’t cool—remember Krispy Kreme?) and in the process, raise consumers’ cost of discovering cronut substitutes, build market share and gain fame and glory as the original and presumably best mashup of two great pastries.

The trademark strategy can be effective, but it’s not certain to succeed. Why? Because for a trademark to be valid, it must have “secondary meaning” – that is, it must signal to consumers the source of a particular product or service. When consumers see a can or bottle with Coca-Cola on it, they know that the contents come from a particular source. Trademarks, in short, are information shortcuts that reduce search costs for consumers.

The law considers some types of trademarks to automatically possess the secondary meaning required to in fact reduce search costs. “Fanciful” marks, like “Exxon”, are considered to automatically point consumers to a particular producer. Why? Because the word is made up – it has no meaning in English other than as a mark for a particular producer’s product – and so is very likely understood by consumers as a term indicating the product’s source.

“Cronut,” on the other hand, is probably what the law calls a “descriptive” mark. “Cronut” describes what a cronut is made of—part croissant, part donut. And so consumers often simply understand it as explaining what the product is.

It’s possible that “cronut” might be judged to be a “suggestive” mark – i.e., one that does not merely describe the product, but instead requires the consumer to take an imaginative step to associate the mark with the product’s characteristics. The line between suggestive and merely descriptive marks is, like a lot of things in trademark law, awfully blurry. That said, if the mark is deemed suggestive, it is much easier to assert secondary meaning.

We think “cronut” is more likely descriptive. And if that’s right, then to enforce it against competitors Ansel will have to prove that consumers associate cronuts with a particular bakery. That may be the case for a few super-foodies in New York City. But once cronut knockoffs really get going – especially outside New York – proving that everyone thinks they come from or are authorized by Ansel’s bakery will be an increasingly dubious proposition. People who see cronuts on every corner don’t associate them with a single producer. They become, like the donuts or croissants from which they arise, generic.

Which, on balance, seems like good news. Even without an enforceable trademark, it seems likely to us that Ansel will continue to reap the rewards of his invention – not least because as long as the cronut remains popular, foodies will continue to flock to his Soho bakery to taste the real thing and he will continue to get unbelievable amounts of free press. And for the rest of us who prefer our cronuts cheaper (or closer), the knockoffs will help keep both our bodies and our wallets fat.

CdrJameson

He should either licence the production of Cronuts, or spin off a 'Cronut company'.

Both would let him capture some of the surplus with no extra work.

The second would allow him to retain control while protecting his idea that his bakery is not just a Cronut shop - it's what Nintendo did to stop being 'that company that just makes Pokemon'.

Joe J

June 13, 2013 @ 4:31pm

Perhaps he realizes it truly is an "obsession at the moment". Basically that this quite possibly is a short lived fad and that a month from now the craze could be over and any expansions would be not needed by the time they are completed. Also by keeping availability low, he increases the craziness of the fad, adding to his businesses fame and brand recognition.

Bob W

June 13, 2013 @ 5:18pm

While foodies may flock to the site of the original cronut, I'd much rather be the knock-off seller. Compare how many people flock to the bar in Princeton that supposedly served the first hamburger to how many people go to McDonalds. I hadn't heard of cronuts until this morning when I heard Kelly Ripa mention it. Her endorsement made cronuts mainstream. Ansel has minutes to capitalize on his invention. I'm sure Krispy Kreme, Dunkin' Donuts and who knows how many other chains already have their test kitchens busy coming up with their version. If the name cronut is trademarked, be prepared for a deluge of dosants.

Janice

June 13, 2013 @ 6:40pm

All I know is that if the cronut creator Dominique Ansel ran for mayor of NYC he’d probably win.
When will the cronuttiness end?
http://gigabiting.com/17349/

tmeier

June 13, 2013 @ 6:55pm

Presumably a 'cronut' is a deep-fried croissant in the shape of a doughnut? That is pastry dough interlarded with butter and then dipped in a vat of hot fat before being coated with a mixture of sugar and more fat.

I suspect the reason it to so long to invent this is a case of human epistemic bias, if we'd invented it sooner we wouldn't be here as we'd have all died of heart disease.

[WORDPRESS HASHCASH] The poster sent us '0 which is not a hashcash value.

James

June 13, 2013 @ 10:00pm

I don't think we ALL would have died, but I suspect natural selection would have thinned the ranks of those who could imagine this as a desirable food.

But after all, people have invented - and presumably other people eat - deep-fried Mars bars, deep-fried turkey, even - believe it or not - deep-fried watermelon.

tmeier

June 14, 2013 @ 1:12am

Well a Mars bar is mostly sugar and fluff and presumably is covered in batter before being fried, turkey is mainly protein and watermelon is mostly... water. What we have with a cronut seems to be fat with just enough dough to keep it from sliding through your fingers when you pick it up - and a dusting of sugar. Although Eskimos seem to do fine eating blubber they accompany it with meat and organs and a strenuous outdoor life rather than a large coffee and eight hours in a chair.

Has anyone worked out how many calories there are in one of these things?

A

June 13, 2013 @ 8:23pm

Definitely disagree that a portmateau is "descriptive" rather than "suggestive" - groupon, netflix, pinterest are all trademarks that suggestive - just like cronut. If it were a "Croissant Donut" or a "Donut Croissant" - then that's certainly descriptive. But cronut is a different beast.

Ash

June 14, 2013 @ 9:18pm

Totally agree... in fact while I was reading the post I was thinking, "No, croissant/donut would be descriptive."

Y

June 13, 2013 @ 8:53pm

This article is wrong. Above poster is correct. Combing two words to make a new word (portmanteau) makes the trademark protectable. I'd be happy to represent the owners of the CRONUT branded pastry against infringers.

Andrew Wilson

June 13, 2013 @ 9:57pm

Reading this makes me wish I knew more about baking. There are some great second mover opportunities here, and calling them "knockoffs" seems like biased language to me. Copying is the heart of innovation, and it's possible that a second generation flake doughnut made in volume could exceed the quality of the small batch original.

Did I miss something? Were Krispy Kreme's problems the result of a fading love for doughnuts rather than blatant mismanagement? The stock price for KKD is holding pretty close to it's ten year high, and the current management is being more careful with expansion this time around. I'd say that Krispy Kreme is back, and the "Hot, Fresh Doughnuts" never seemed to wane in popularity (at least here in the South).

Andrew Wilson

June 13, 2013 @ 9:59pm

EDIT: That should read "The stock price for KKD is holding pretty close to it’s NINE year high"

Franky

June 13, 2013 @ 10:11pm

Very well put. It is a descriptive term and cannot be trademarked

Mike H

June 14, 2013 @ 12:53am

Here's two ideas of the free market ideal:

1) Economic agents act in rational ways, to maximize their utility.

If this idea is true, then Ansel's strategy is truly puzzling. Rationally, he should realise his trademark is untenable, and not a sound footing for his business strategy even if tenable. Then, he should form a franchise, or raise the price, or ramp up productuon.

2) Economic agents act in random waysThe ones who thrive and become visible are just those lucky enough to (by chance) act in ways that maximize their utility.

If this idea is true, then the paradox disappears. Ansel was lucky enough to think of the cronut, but not lucky enough to think of ways to expand supply. Out there are other bakers who are lucky enough to think of copying the cronut, some of these will be lucky enough to succeed commercially as well.

3) The truth is probably a mixture of 1 and 2.

James

June 14, 2013 @ 5:20am

But the utility being maximized in #1 is often subjective. Ansel is presumably maximizing the utility of his cronuts according to his own values. Just as, from the consumer side, the opportunity to eat a cronut is apparently worth up to $40 to some people, while others (me!) likely wouldn't eat one on a bet.

chris.smith@aol.com

June 15, 2013 @ 12:38am

A cronut and small coke please... New York regulates SODAS!!! such a joke